BoE's Fisher - new scheme will boost credit supply

LONDON (Reuters) - A Bank of England scheme to give lenders cheap funding will boost credit supply to the recession-hit economy as the majority of Britain's big banks have signed up, central banker Paul Fisher said on Tuesday.

The rate-setter also sounded a note of cautious optimism about the European Central Bank's recent steps to calm the euro zone debt crisis, though he urged European governments to use the opportunity to find a lasting fix to the crisis, which the BoE sees as one of the main drags on the British economy.

Britain's government and central bank started the new scheme in August, hoping to remove one of the obstacles to economic recovery by offering cheap funds to lower banks' funding costs.

"I am confident that the FLS (Funding for Lending Scheme) will help the supply of credit," Fisher said in a speech. "Before its introduction, it was more likely than not that the stock of credit would contract further over the next 18 months."

Fisher said that 13 lenders had signed up for the scheme, representing 73 percent of the stock of lending to households and companies, as of the end of June. A significant number of other institutions were close to signing up too, he added.

Under the scheme, banks and building societies can borrow up to 5 percent of their stock of existing lending from the BoE, plus any expansion of its lending during the period between the end of June and the end of 2013.

With some 1.2 trillion pounds of lending to firms and households on their books, the banks currently participating could tap a total of around 60 billion pounds in cheap funds, compared to some 80 billion if all banks took part.

It may take banks a while to fully review their lending plans, and drawings on the scheme will likely be spread out over the full time frame to the end of 2013, Fisher said. The BoE will provide details about banks' use of the scheme on December 3.

Fisher said five of Britain's six largest banks had signed up for the scheme. HSBC said right at the start it did not want to participate as it preferred to fund lending through customer deposits.

CALMER MARKETS

A lack of credit is one of the obstacles to recovery for the economy, which has been slowly moving out of recession over recent months.

Some BoE policymakers have indicated that they believe the funding for lending scheme could be a better way to get a recovery going than further purchases of government bonds with newly created money.

Most economists still expect another dose of quantitative easing asset buys once the current 50 billion-pound round is completed in November.

"Should the FLS succeed in boosting aggregate demand, then pressure on the MPC to relax policy will wane," Barclays analyst Chris Crowe said in a note.

However, Crowe was sceptical about the overall impact of the scheme. "We do not think that banks will substantially relax lending standards to promote new lending," he said.

Previous schemes to spur lending since the financial crisis have failed to give a clear boost to the economy. The government has also launched a state-backed business bank to provide more loans to smaller companies.

The British Bankers' Association (BBA) said that lending to consumers and businesses fell again on the year in August.

"Over time, the Funding for Lending Scheme will improve lending conditions, though it is too early to measure any impact yet," the BBA said, adding that the weakness in the economy may well be the reason why companies were reluctant to borrow.

The BoE has said the cost of loans and tighter credit conditions are a major reason for the lack of lending, blaming the euro zone debt crisis for a rise in banks' funding costs.

The ECB's recent decision to buy bonds from countries like Italy and Spain had improved market sentiment, Fisher said.

"I would caution, however, that we have been here before," he said. "Along with every other market participant I hope that this time will be different."

Politicians now had to use the time provided by the central bank's action to take the necessary steps such as improving the competitiveness of southern European countries, he said.

(Additional reporting by Olesya Dmitracova)

Source: http://news.yahoo.com/boes-fisher-scheme-boost-credit-supply-060223544--business.html

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